ACI s 20 th National Forum on Consumer Finance Class Actions & Litigation. Sanjay P. Ibrahim Parker Ibrahim & Berg LLC. October 23-24, 2014

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1 DEFENDING AND MANAGING CLAIMS RELATING TO OVERDRAFT FEES, CREDIT, DEBIT AND PREPAID CARDS, BANK ADD-ON SERVICES AND PRODUCTS, RETAIL BANKING & EMERGING PAYMENT MODELS AND ENHANCED GOVERNMENT SCRUTINY OVER PAYDAY LOANS AND DEPOSIT ADVANCE LOANS Sanjay P. Ibrahim Parker Ibrahim & Berg LLC ACI s 20 th National Forum on Consumer Finance Class Actions & Litigation October 23-24, 2014

2 WHAT STATUTES APPLY? Disclosures: TILA/Reg. DD (12 CFR ) Overdraft protection disclosures for consumer deposit accounts Effective December 2011 Additional disclosures required for overdraft services: Periodic Statements - Total Overdraft Fees : Total amount of NSF charges and for paying overdrafts Totals for year to date and for statement period Sample disclosure form Automated System Account Balance Disclosure: Actual balance - shall not include additional amounts institution may provide to cover item if insufficient funds in account May provide such additional account balances as part of disclosure: Prominent statement that balance includes such additional amounts If applicable, that additional amounts are not available for all transactions

3 Reg. DD (cont.) Advertising Disclosures: STATUTES (CONT.) Amount of fee for each overdraft payment Categories of transactions subject to overdraft fees Deadlines to repay overdraft Circumstances under which institution will not pay overdraft Exceptions, e.g.: Television, radio advertising, billboards ATM screen ad, ATM receipt, or ATM disclosure that transaction may trigger an overdraft fee In-person discussion with consumer Term in deposit account agreement re. institution s right to pay overdrafts Indoor signs that clearly and conspicuously state (i) fees may apply, and (ii) contact employee for further information

4 STATUTES (CONT.) Opt-In Requirement EFTA/Reg. E (12 CFR ): Effective 2010 Bank can impose overdraft fees for ATM or one-time debit card transaction only if consumer affirmatively opts in to the service Bank must provide written notice of overdraft service setting forth: types of transactions subject to overdraft fee fees including daily or other overdraft fees; maximum fee maximum number of fees that may be assessed, or if applicable, that there is no limit method for consent and opt in other options for covering overdrafts e.g., line of credit or service that transfers funds from one account to another Bank must give written or electronic confirmation of the consent and statement of consumer s right to revoke consent

5 Reg. E (cont.) Miscellaneous Provisions: STATUTES (CONT.) Cannot condition payment of overdrafts for other types of transactions on customer s opt-in to the ATM or one-time debit overdraft service Joint accounts: opt-in or cancellation by one account holder is for the entire account May opt in or out at any time Federal Trade Commission Act - 15 USC 45(a)(1): Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful

6 CFPB PERSPECTIVE: OVERDRAFT PRACTICES REPORTS Checking Report released June 2013/Debit Report released July 2014 Raised concern about whether overdraft costs can be anticipated and avoided Findings: Overdrafts are Costly Opted-in accounts pay almost $260 per year in debit overdrafts and NSF fees compared to just over $35 for non-opted-in accounts 20% - 27% of accounts had at least one checking overdraft or NSF transaction % of account holders were heavy checking overdrafters (more than 10 NSF or overdraft transactions) 18% of opted-in debit card users overdraft more than 10 times per year, compared to 6% of non-opt-in accounts Most debit overdrafts occur for small transactions (< $25), but median overdraft fee is $34 Equivalent to 17,000% interest rate if overdraft and fees paid after three days Reduction of fees for account holders who did not opt in was $347 greater than those who did opt in

7 CFPB OVERDRAFT PRACTICES REPORTS Findings: Involuntary Account Closures Overall average 6% of accounts Varied widely 2.1% to 9.0 % Charged-off balances equal 14.4% of overdraft fees Findings: Opt In Rates 15.2% of checking account holders opted in/44.7% of Heavy overdrafters opted in Higher opt in rate for accounts opened during study period than already open accounts

8 CFPB OVERDRAFT PRACTICES REPORTS Bank Practices: Effect on Overdraft Status Time lag in availability of deposited funds Transaction posting order Overdraft coverage limits Fee waivers or delay for small overdrafts or short overdraft periods Additional fees for extended or sustained negative balances Marketing or lack of marketing re. linked accounts Conclusions Additional research required to determine whether certain practices are causing consumer harm Small but significant segment of consumers continue to incur large number of overdraft/nsf fees Striking variation in consumer experiences and outcomes Average annual overdraft fees varied by over $201 Highest involuntary acct closure rate was 14 times the lowest rate Opt-in rate varied from less than 10% to over 40%

9 OVERDRAFT PROTECTION ACT OF 2013 (HR 1261) - WHERE WE RE HEADED? 3/19/2013: Referred to House Committee on Fin. Services; 45 cosponsors If passed would codify 2010 Fed. Res. Rules requiring opt-in for overdraft coverage and extend protections to checks in addition to debits Limit overdraft fees to one per month and six per year Institution has discretion to pay without charge or to reject any other overdrafts Overdraft fee must be reasonable and proportional to amount of overdraft Prohibit overdraft fee that results solely from a hold on the account that exceeds the amount of the transaction Prohibit posting of transactions designed to maximize overdraft fee (i.e. posting transactions from highest to lowest) Clear and Conspicuous disclosures: Fee limits; Alternatives to overdraft coverage (e.g. linked accounts); Overdraft fees on periodic statements

10 ENFORCEMENT 15 USC 45(a)(1): Different Context Same Result: Consumer Bank Accounts Woodforest (OCC, 2010) Student Debit Cards - Higher One & Bancorp (FDIC, Aug. 2012) Community Reinvestment Act Exam BankAtlantic (OCC, 2012) Need to Improve rating because of overdraft protection program Common Infractions: Inaccurate fee information in opt-in notices Allowed customers to exceed overdraft limit No limit on overdraft fees - Charged continuous overdraft fee Re-enrolled suspended customers in overdraft protection without prior notification Marketed low cost or free features of account while omitting costly features such as overdraft protection Charged multiple NSF fees from single transaction Did not disclose limits on linked account transfers

11 ENFORCEMENT: COSTLY Penalty Restitution Woodforest $1 Million $32 Million RBS Citizens $10 Million $3.9 Million Higher One $110,000 $11 Million est. Bancorp $172,000 Must pay if Higher One defaults

12 ENFORCEMENT: ADMINISTRATIVE BURDENS Internal Remediation Programs (subject to OCC approval) Board responsible for ensuring bank compliance with Order Independent Compliance Committee: Responsible for maintaining bank s compliance with order Quarterly progress reports to OCC Order may dictate overdraft fee policies Update Compliance Risk Management Systems and Policies Policies and procedures for internal controls and secondary reviews Audit program for compliance with consumer protection laws Process to address exceptions in audit report Implement procedures for each applicable consumer protection law

13 ENFORCEMENT: ADMINISTRATIVE BURDENS Action Plan: Develop plan to achieve compliance with Order Vendor Relationships: Order may terminate contract Offending vendor may be required to notification depository institutions for which it provides services of any regulatory agency inquiries or legal actions, or consumer legal actions Offending vendor may be required to obtain depository institution approval of policies and procedures

14 IDENTITY THEFT AND PAYMENT PROTECTION PLANS REGULATORY ENFORCEMENT ACTIONS

15 WHAT ARE THE SERVICES? Credit monitoring and notifications: Credit card company/bank monitors consumer s credit reports and notify consumer of suspicious activity Condition: Two-step enrollment process: Enroll in program with credit card company Activate: FCRA requires written authorization for credit bureau to allow credit card company to obtain credit reports as required by FCRA, 15 USC 1681b Lost card cancellation services: Facilitates the cancellation of lost or stolen credit cards Payment Protection: Reduces or eliminates monthly payments when qualifying event occurs (such as unemployment, disability) Limitations: Not available for pre-existing conditions

16 WHAT STATUTES ARE APPLICABLE? CFPB: UDAAP - 12 USC 5536(a)(1)(B): It shall be unlawful for any covered person or service provider to engage in any unfair, deceptive, or abusive act or practice Federal Trade Commission Act 15 USC 45(a)(1): Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.

17 ENFORCEMENT ACTIONS Date Institution Regulator July 2012 Capital One Bank USA CFPB/OCC Sept 2012 Discover Card CFPB/FDIC Sept 2013 JPMorgan Chase Bank CFPB Dec 2013 American Express CFPB/FDIC April 2014 Bank of America CFPB/OCC June 2014 GE Capital CFPB Sept 2014 US Bank CFPB/OCC

18 DECEPTIVE PRACTICES: COMMON THEMES Engaged in deceptive tactics by misrepresenting: Cost: Consumer led to believe free service; telemarketer making courtesy call or updating account ; asked consumer to enroll or become member without explaining it was an actual purchase Benefits: Failed to disclose pre-existing condition ineligibility of payment protection service; falsely suggested payment protection service always cancelled minimum monthly payment when it might not, or that payment protection lasted longer than it actually did Terms and Conditions: Rapidly recited material terms and costs; falsely stated written terms and conditions would be provided prior to any charge; falsely stated limited time offer Consent: Billed for credit monitoring that had not been activated Cancellation: Difficult to cancel; aggressive marketing pitch during consumer s cancellation call

19 CONSENT ORDERS: COSTLY! PENALTY ($191.5 million) RESTITUTION ($1,545 million) Capital One $25 Million $140 Million JPMorgan Chase Bank $80 Million $309 Million Discover Card $14 Million $200 Million American Express $16.2 Million $59.5 Million Bank of America $45 Million $727 Million GE Capital $3.5 Million $56 Million US Bank $9 Million $48 Million

20 CONSENT ORDERS: COSTLY! Reimbursement Plan: Reimburse fees, over-credit limit charges, interest charges Orders set forth procedure for calculating reimbursement amount Automatic Refund: credit account if current account holder./mail check if account closed Retain independent accountant to monitor compliance with Remediation Plan

21 CONSENT ORDERS: ADMINISTRATIVE BURDENS Compliance Plan (subject to regulatory approval) Form compliance committee - management responsible for oversight of addon products. No marketing products until plan approved Consent Order sets forth dos/don ts for telemarketing scripts, mail disclosures, cancellation procedure Risk Management Program (subject to regulatory approval) Independent group within bank to develop risk management program: Analyze proposed changes to the governance, marketing, sales, delivery of consumer products at high risk for unfair deceptive abusive acts and practices Periodic reviews and revisions as necessary for: Changes to marketing or provision of high risk products Any new products at high risk for UDAAP

22 CONSENT ORDERS: ADMINISTRATIVE BURDENS Vendor Management Plan (subject to regulatory approval) Policies and procedures for oversight of vendor s compliance with consumer protection laws and bank s policies and procedures Written contract with vendors Vendor s duty to maintain adequate controls and training to assure compliance with federal consumer protection laws Grant bank right to conduct on-site reviews Internal Audit Program (subject to regulatory approval) Independent third party review of all add-on products for compliance with consumer protection laws Written policies and procedures for: Auditing bank s compliance with consumer protection laws Expanding sampling when potential violations are found Audits reported to regulator Compliance issues identified? Submit remediation plan

23 CONSENT ORDERS: LONG TERM Progress Reports Periodic progress reports to regulators Include certificate of compliance signed by Board member: If not in compliance, certificate must identify deficiencies, actions taken to comply, and date for completion Board of Directors has ultimate responsibility for ensuring bank complies with federal consumer financial laws and Consent Order

24 REGULATORY ENFORCEMENT AND PAYDAY LENDERS

25 WHAT IS A PAYDAY LOAN? Short term, relatively expensive, small-dollar loans Usually less than $ Single balloon payment coinciding with borrower s next payday Set fee for loan based on amount borrowed rather than periodic interest rate Generally range from $10 20 per $100 Marketed as a way to bridge unexpected shortfalls between paychecks or other sources of income Can offer quick and easy accessibility to cash for consumers who otherwise do not qualify for credit CFPB began supervising payday lenders in January 2012 and accepting complaints in November 2013

26 CFPB INTEREST Concern that too many borrowers slide into the debt traps that payday loans can become March 2014 Data Point Report: 80% of payday loans are renewed within 14 days 15% of initial new loans are rolled over at least ten times Loan size likely to increase the more it is rolled over 80% of loans that are rolled over are for a greater amount than the initial loan Majority of borrowers are government benefit recipients May 2014 CFPB Spring Rulemaking Agenda: Researching whether rulemaking is warranted

27 ENFORCEMENT: ACE CASH EXPRESS CFPB July 2014 Consent Order In-House and Third Party Collectors violated UDAAP (FDCPA-like violations): False threats of lawsuits or criminal prosecution to pressure borrower into taking additional loans, with fee for new loan False threats of extra fees or negative credit reporting Excessive collection calls; disclosed debt to employers and relatives $5 Million Restitution; $5 million CFPB Penalty

28 ACE CASH EXPRESS (CONT.) Cease and Desist: Refrain from calling borrower who has notified ACE not to communicate any further Refrain from directly communicating with borrower represented by attorney Suspend collection efforts of any disputed debt until ACE conducts reasonable investigation Shall not suggest or encourage delinquent borrower to pay off loan and take out new loan Compliance Plan: Detailed action plan for carrying out Consent Order Training plans and written job-duties including employee accountability and authority Debt collection call monitoring Long Term: Reporting requirement and Consent Order in effect for 10 years

29 PENDING ENFORCEMENT CFPB v. Richard Moseley, Sr., et al. FTC v. CWB Services, et al. Filed Sept, 2014 in USDC, Western District of Missouri Defendants allegedly deposited $200 - $300 payday loans into consumer bank accounts without consent and then repeatedly debited $60 - $90 finance charges every two weeks Defendants allegedly fabricated documents to justify debits when consumer notified bank that withdrawals were unauthorized Consumers who closed accounts to stop the unauthorized withdrawals were harassed by debt collectors Defendants obtained consumer s account information when consumers provided their information to online payday loan shopping sites Violated: TILA failed to make requisite disclosures, EFTA unauthorized electronic funds transfers, and the CFPA Unfair and Deceptive Acts and Practices

30 OPERATION CHOKE POINT

31 OPERATION CHOKE POINT: WHAT IS IT? DOJ and Regulator (OCC, FDIC, etc.) initiative to prevent fraudsters from accessing consumer bank accounts by choking off their access to the payments system Targets high risk industries as identified in 2011 FDIC report (e.g. payday lenders, online gambling, online lenders, pornography, dating services, firearms sales, racist materials, telemarketing, tobacco sales, travel clubs, etc.)

32 OPERATION CHOKE POINT: DOJ PERSPECTIVE Third party payment processors are frequently the means by which fraudulent merchants are paid Provide access to banking system and facilitate movement of money from victim to scammer Financial Institutions are not always blind to these scams Banks allow payment processors to continue maintaining accounts within their institutions, despite the presence of glaring red flags indicative of fraud (such as high return rates) Choking fraudulent merchant s access to the bank or payment processor, cuts off their access to the consumer

33 OPERATION CHOKE POINT: CHRONOLOGY March 2013 DOJ Speech announcing intention to crack down on banks that allowed online scammers to access the payments system DOJ issued 50 subpoenas to banks and payment processing firms Fall 2013, DOJ pressured subpoenaed banks to settle January 2014: Four Oaks Bank (NC) settlement July 2014: FDIC issued revised report removing the list of high risk industries from its 2011 report Cited: misunderstandings regarding the FDIC s supervisory approach to institutions relationships with TPPPs, resulting in the misperception that the listed examples of merchant categories were prohibited or discouraged

34 OPERATION CHOKE POINT: CONCERNS Forces banks to act as law enforcement Penalizing banks for the crimes (or risk of crime) of its customers (or customers of its customers) Over-reaching Broadly drawn list of high-risk entities targets entire legal industries, rather than narrowly focuses on individual business List is guided by moral censure Economic Impact Banks pre-emptively cutting off relationships with businesses deemed risky by the DOJ Results in shut down of legal, but politically disfavored businesses Loss of jobs, loss of tax revenue Creates a black market for those services and products

35 CONGRESSIONAL INVESTIGATION October, 2014 Committee on Oversight and Government Reform investigating Federal Reserve involvement in Operation Choke Point Requested broad range of documents from Federal Reserve regarding its involvement in Operation Choke Point Federal Reserve s response due October 30th Concern that federal regulators may be pressuring banks to terminate relationships with legal yet disfavored industries Cited FDIC order to unnamed bank to terminate relationships with all payday lenders Cited SunTrust bank s decision to discontinue banking with payday lenders, pawn shops and dedicated check-cashers

36 COMMUNITY FINANCIAL SERVICES ASSOC. OF AMERICA V. FDIC, FEDERAL RESERVE, OCC June Payday lender association filed Complaint in USDC Federal District Alleges Operation Choke Point exceeds statutory authority and is arbitrary and capricious No objective criteria as to Regulators claimed reputational risk to banks providing financial services to payday lenders Regulators failed to engage in notice and comment rulemaking, thus violating procedural requirements in promulgating rules and changing the definition of reputation risk Claims Operation Choke Point targets variety of lawful businesses that are disfavored by Defendants but is aimed primarily at the payday loan industry with a goal to drive payday lenders out of business by exerting back-room pressure on banks and other regulated financial institutions to terminate their relationships with payday lenders Over 80 banks terminated business relationship with CFSA members

37 CFSA V. FDIC, FEDERAL RESERVE, OCC FDIC Motion to Dismiss (Pending): Plaintiff has no standing to contest FDIC guidance documents cautioning banks about high risk relationships Complaint does not allege any injuries traceable to FDIC any loss of business is traceable only to the banks with whom plaintiffs had relationships FDIC guidance documents do not constitute final agency action Merely warned banks that certain third-party relationships could pose risks and set forth suggested due diligence processes for analyzing those risks, along with strategies for minimizing risks. Guidance documents are moot because subsequent guidance documents withdraw references to specific industries and clarify that banks with appropriate controls are not barred from entering into relationships with third parties that are in compliance with applicable laws.

38 CFSA V. FDIC, FEDERAL RESERVE, OCC OCC Motion to Dismiss (Pending): Not a part of Operation Choke Point OCC does not encourage or require that an institution ban entire lines of businesses from being customers OCC requires that banks assess risk on customer by customer basis Requested relief fails to satisfy redressability requirement of Article III No causation banks ended relationship without OCC participation Court lacks jurisdiction to order OCC to cease enforcement activities OCC Bulletin is a general statement of policy and not subject to notice and comment rulemaking Guidance as to potential risks to OCC regulated institutions including reputational risk - is within OCC statutory mandate

39 WHAT IF PAYDAY LENDING EXTINGUISHED? Payday loans can offer some stability for those living paycheck to paycheck when they have unexpected expenses No payday loans = no access to short term funding for those with poor credit and unexpected expenses Forego medical procedures or payment of other necessities, such as rent or mortgage Increased risk of impoverishment, homelessness, hunger, health issues, child care issues, etc. when no access to credit